The property cycle has three distinct phases: boom, slump, recovery. The slump phase, the one we’re about to enter, typically tends to be met with denials. We’ll be told that prices can’t go down, not with the current demand demographics backing them up.
We’ll be told that Ireland’s chronic undersupply makes it an exceptional case internationally. But these old tropes have never trumped the boom-and-bust dynamic.
The industry also has a vested interest in talking up the sector to entice investment. As we saw in 2007-2008 this can continue quite late in the day, in the face of conspicuously deteriorating metrics.
The economic case for a downturn in values doesn’t make sense, not if you believe housing is a simple case of supply and demand. But property doesn’t fully adhere to those rules. People tend to buy, developers tend to build, when prices increase.
The converse is true when prices decline. Perception plays a big role. Increasingly economists are coming around to the view that price expectations may be the single biggest determinant of headline inflation.
Property is also a highly financialised asset, driven by trillions of euro of speculative cash. Most of the current development in Dublin is being financed by international funds chasing returns in the build-to-rent sector. And underpinning these funds is the great financial experiment of the era, quantitative easing and low interest rates.
There are clear signs, however, that the current dynamic is ending and that the Covid-induced price surge has reached a tipping point with higher living costs and higher interest rates now likely to act as a restraint on buyers.
In Toronto, one of the hottest property markets on the planet, real-estate prices fell for the second straight month in April.
The average price of a home in Canada’s largest city declined 6.4 per cent to C$1.2 million (about €885,000), according to the Toronto Regional Real Estate Board.
That was the biggest monthly drop since April 2020 when the market was largely frozen because of Covid-19 lockdowns. The number of houses sold in Toronto declined 26 per cent. Vancouver exhibited similar declines.
The about turn appears to the linked to the Bank of Canada 's aggressive interest rate hikes. Since the beginning of March, the central bank has lifted the benchmark interest rate from 0.25 per cent to 1 per cent in a bid to rein in runaway inflation, and markets expect the rate to rise to at least 1.5 per cent in June. New Zealand, which saw one of the biggest price surges in housing during Covid, is experiencing a similar retreat, also on the back of interest rate hikes.
The same dynamic is emerging in the United States. And remember these countries are experiencing severe housing crises, marked by a dearth of supply and unaffordable price metrics. Declining rates of home ownership in New Zealand has become a major political issue.
The only thing we’re missing here is the interest rate hikes but they’re on the way. With euro-zone inflation at a record high 7.5 per cent, nearly four times the European Central Bank’s 2 per cent target, pressure is growing on Frankfurt to act and several policymakers are already pushing for faster “normalisation”.
ECB chief Christine Lagarde and our own Central Bank governor Gabriel Makhlouf have indicated that a sequence of interest rate increases could begin as early as July. Markets are pricing in 90 basis points of rate hikes for the rest of the year, in other words between three and four 25-basis-point moves between now and Christmas.
But there's another weave in the tapestry, one that is arguably more germane to Ireland, that will also act as a cooling agent. After a decade of near-dormant construction, homebuilding is taking off.
The number of new homes built in the first quarter of 2022 was the highest since the Celtic Tiger era.
The Central Bank is forecasting that about 25,000 new housing units will be built this year, rising to 30,000 in 2023 and 35,000 in 2024. The 35,000 figure is roughly the estimated level of demand in the market, although some maintain it is higher. This should exert further downward pressure on prices.
Most estate agents here haven’t recalibrated for these new dynamics and are still forecasting healthy price growth for remainder of the year and beyond. But they were also the ones that thought Covid would see the market tank.
A cooling of some sort is perhaps inevitable given the appreciation of values and the fact there are limits to affordability. The slump phase of the cycle is typically determined by how big the boom phase was.
The bigger the climb, the bigger the fall. Despite what you might think, Ireland hasn’t had as big a Covid bubble in house prices as other countries so the climbdown may be more moderate, but it’s coming.